John Marmaduke

Let’s Not Ride CDs Into The Sunset

By John Marmaduke

President & CEO

Hastings Entertainment

Hastings is the original multimedia retailer, so we have a unique perspective on evaluating the various entertainment offers we sell. We’ve been very satisfied with growth of packaged entertainment this year. Consumers are buying more entertainment and adopting more new configurations than ever before. But our outlook has been diminished in the last few years by declining music performance, even when frontline CD comparable sales are positive. We believe the problem with prerecorded music isn’t the music or the customers, but a combination of configurations and misdirected pricing.

Prerecorded music has two dying configurations, cassettes and singles, while the mainstay configuration, the CD, is over 20 years old! You can’t expect growth from that configuration scenario. The overall small negative sales “comp” in music looks robust to us, considering this and other self-inflicted handicaps currently placed on music. A few innovations as witnessed in other entertainment industries are needed to re-energize our business.

The video industry illustrates how to revitalize the music business. DVD is the fastest adopted configuration in history, more than doubling CD and VCR adoption rates. The DVD Entertainment Group estimates over 25 million units will be in U.S. homes after Christmas this year, every one DVD/audio-compatible! Many retailers are seeing increases of 150% or greater in DVD software; DVDs now account for almost one-half of video sales and soon will account for 25% of rentals.

DVD has reinvigorated consumers’ enthusiasm for renting movies; VHS rentals are slightly down a fraction of the DVD increase. DVD is a winner because of its significantly superior viewing, enhanced material and sound! That’s right, “superior sound” is the #1 advantage of DVD to young consumers. The music industry is overdue for a similar product enhancement.

After 20 years, CD sound is not good enough to command the premium price of $18.95 MLP. Unfortunately, each price increase promotes increased duplication by the consumer in subsequent weeks of release, creating a “doom loop” of increasing price resistance, lower volumes and less total revenues. The way to command a high price and grow unit volume is with a better product.

There is a second lesson from the video industry: pricing and repricing front-line goods to increase volume and impulse sales. To revitalize the CD, we must reduce wholesale prices immediately as unit volume declines. This lesson will be hard to learn for the European multinationals who think American CD prices are too low and the secret to high profit is a slow ratcheting up of prices. Look, however, at the disturbingly large front-line CD sales declines in Europe. Their high price philosophy no longer works. High, static prices breed a home industry of burning CDs, file-sharing and even piracy. Since 1998 the rate of week two sales on hit music product has gone from 76% of week one to 66%. And each subsequent week continues that decay. We’ve lost the equivalent of half of week one’s sales to CD burning and it’s growing! Technology no longer permits total copyright protection. As Microsoft learned, lowering prices on Windows is the best deterrent to copying, and it hasn’t hurt Microsoft’s profits either.

Today’s CD could have renewed viability and, at the same time, undermine the incentive for disc-burning once it is midline priced! Unfortunately, the conversion from front-line to mid-line is too slow in music to drive significant volume. The video industry converts to mid-line in five months or less and software in three months or less. The music industry should be equally creative. To drive volume, the price reduction should be driven by sales declines, not time. This suggests that our artists’ contracts must be revised to allow dynamic pricing to increase copyright-protected revenue instead of our current piracy-promoting static pricing.

We encourage our vendor-partners to aggressively convert to new, superior audio formats and use dynamic pricing to reinvigorate our CD business. Our industry has committed the classic mistake of the hardware industry -- sticking with a configuration too long. Keeping the same pricing formulas in the face of declining sales is no solution. Give us a better quality format for our front-line price and dynamic CD pricing to fight piracy and home-taping. Add to that exciting music releases and retail will do the rest.

Let’s not ride CDs into the sunset!

National Association of Recording Merchandisers
9 Eves Drive, Suite 120, Marlton, NJ 08053
phone 856.596.2221 / fax 856.596.3268
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